Saturday, September 26, 2009

New York -(Dow Jones)- Duncan Niederauer, chief executive of the NYSE Euronext (NYX), said he sees reason to be optimistic about the economy, but believes it's far too early to tell if the market's rebound indicates an economic recovery.

Niederauer said he hasn't seen enough from the government to directly stimulate investments. He made his comments here Thursday at the Investment Company Institute's 11th annual capital markets conference.

"We need to make sure that the money is available, and right now the credit market is not really open," he said. If you are a smaller company looking for affordable private capital, "forget it," he said.

He also called for simpler, more harmonized market regulation, and a more level playing field between regulated exchanges and alternatives, such a dark pools.

With U.N. meetings now taking place in the city, Niederauer said he's met with many heads of state this week.

"When I say that it's really difficult for small companies with pristine credit ratings to get affordable private capital," they say it's the same in their countries, he said.

While a lot of the solutions proposed by the Obama administration are " directionally correct," it hasn't taken action on many reforms yet, Niederauer said. One area of concern, he said, is the gap that exists between the Securities and Exchange Commission and the Commodity Futures Trading Commission.

It's important to recognize that a lot of those in Washington, D.C., are not aware that about 40% of the market is opaque and largely unregulated. "They don't understand it," he said.

As for unregulated exchanges, Niederauer said he's not calling for the end to dark pools, though he does wish the barriers to entry were higher. He noted, however, that "we are burdened with a lot of stuff that those entities are not."

While a dark pool can simply move ahead with an idea, "we have to write a rule, file with the SEC, go through drafting, drafting, drafting," to move forward, he said. "They go fast, and we are forced to go really slow."

He called on regulators to level the playing field between the regulated exchanges and these unregulated venues.

"If you are going to allow these pools to exist, why would anyone want to be a regulated exchange?" he asked. "There are only burdens (to being a regulated exchange) in this country, and it's becoming increasing the case in Europe."

In addition, Niederauer indicated that there's room for manipulation of exchanges as they exist now. "If our responsibility collectively is to police the broader equity market, somebody needs 100% of the information," he said. " Right now, we don't have it."

Those venues that say they can't be manipulated don't know enough to be sure, he said. Those who wish to manipulate will not execute all legs of their plan in one venue, he said.

President Obama's economic advisers are struggling to sell their financial reform plan to . . . an Obama economic adviser. Paul Volcker, the Democrat and former Federal Reserve chairman who worked with President Reagan to slay inflation in the 1980s, now leads President Obama's Economic Recovery Advisory Board. He warned in Congressional testimony Thursday that the pending Treasury plan could lead to more taxpayer bailouts by designating even nonbanks as "systemically important."

"The clear implication of such designation whether officially acknowledged or not will be that such institutions . . . will be sheltered by access to a federal safety net in time of crisis; they will be broadly understood to be 'too big to fail,'" Mr. Volcker told Congress.

Rather than creating broad bailout expectations destined to be expensively fulfilled, the former Fed chairman wants Washington to draw a tighter circle around commercial banks with insured deposits. Those inside the circle get heavy oversight and are eligible for assistance during a crisis. Assumptions that various other firms also enjoy the federal safety net "should be discouraged," said Mr. Volcker.

We don't agree with all of Mr. Volcker's prescriptions—nor he with ours—but on too big to fail he's exactly right. As he also told Congress, regulators are unlikely to correctly guess which firms will pose systemic risk, and the implicit protection by taxpayers could put firms not deemed important by Washington at a market disadvantage. He also pointed out that, while Team Obama pushes its plan to address firms that are "systemically important," Treasury still hasn't said what exactly that means.

Mr. Volcker's comments won't endear him to Administration officials due to receive more power under the Treasury plan, but taxpayers should be cheering his counsel.